Pennsylvania Pension Returns 3.7% in Q3 | Chief Investment Officer

The Pennsylvania State Employees’ Retirement System (PSERS) reported a 3.7% return for the third quarter of 2017, and an 11.2% net-of-fees return on investments during the first nine months that added nearly $2.9 billion in earnings to the fund.

“Strong performance from the global public equity, private equity, and fixed income portfolios have driven strong calendar-year returns,” said PSERS CIO Bryan Lewis in a statement.

The returns kept pace with the system’s first-half returns of 7.1% that generated nearly $1.9 billion in net-of-fees earnings.

The PSERS board also approved up to $175 million in new commitments that will be funded from cash subject to successful completion of contract negotiations. The board approved a commitment of up to $100 million to Brightwood Capital Fund IV, L.P., to focus on private debt investments in US middle-market companies. The remaining $75 million was approved to Providence Strategic Growth III, L.P. as a follow-on investment to focus on growth equity investments in lower middle-market technology-enabled companies in North America.

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The commitments come on the heels of $225 million in new commitments announced in November. Of this amount, $150 million was earmarked for its multi-strategy asset class to TSSP Adjacent Opportunities Partners, L.P., as a follow-on investment to the strategy the board approved in September. The fund will focus on the purchase or origination of opportunistic credit, special situations, and distressed investments. The other $75 million was committed to Clearlake Capital Partners V, L.P., as a follow-on investment to focus on value-oriented buyouts, credit/structured equity, and distressed/turnaround transactions involving North American middle-market companies.

The board also said it received a study, requested during its September meeting, in partnership with the administrator of the commonwealth’s voluntary 457 deferred compensation plan for state employees. The study investigated developing a plan to increase participation in the program among currently eligible employees and to identify the steps necessary to expand eligibility to municipal employees across the state. The board also directed the personnel committee to advertise for executive director candidates to fill the vacancy that will be left after the Jan. 5, 2018, retirement of David Durbin, which was announced in November.

Tags: Pennsylvania, PSERS, Returns

In its 2018 outlook report, Wells Fargo Investment Institute said that although the current bull market is maturing, it expects it to continue through 2018, with the international markets leading the way.

“As we look at 2018, we see the US bull market aging, but it doesn’t end in 2018,” said Sean Lynch, co-head of global equity strategy at a presentation of the report. However, he added, “though we don’t think returns will match what we’ve seen over the past 8 ½ years.”

Lynch said the firm expects the S&P 500 to hit 2,700, and for earnings and revenues to continue to grow at a rate of 12% and 6%, respectively.

“The global expansion is coordinated, synchronized some would say, but the US expansion is more mature,” said Darrel Cronk, CIO of Wells Fargo Wealth and Investment Management, at the presentation. “International markets continue to pose better earnings growth prospects, cheaper valuations, and are earlier in the recovery cycle than the US.”

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The report, “Moving Ahead in an Aging Recovery,” also says that investors should be more selective in asset selection.

“We are at a point in the cycle when it’s particularly important to seek ways to reduce unnecessary portfolio risks, which is best accomplished through a diverse portfolio,” said Cronk. “We believe the primary portfolio challenge for 2018 will be to assess risk and reward more diligently as investors look for late-cycle opportunities.”

In its report, Wells Fargo Investment Institute also said that active management is expected to have a big resurgence in 2018, and that investors should incorporate active management strategies into portfolios.

“People don’t really realize that that the active-passive debate is a cyclical debate,” said Adam Tabak, head of global alternative investments. He said that early in an economic cycle, passive investing will do well, but that active managers are better positioned during the later stages of the economic cycle, and into a recession.

“We think we’ve firmly entered into that phase where we’re in the later stage,” said Tabak. “It is going to get harder to pick winners and losers, and a good active management, especially in the hedge fund side, should be very well positioned … the best that we’ve seen them positioned in the last 10 years.”

The report also outlined five actions it thinks investors should consider going into 2018:

Evaluate your current portfolio allocation versus historical crises events. Equity allocations could have moved beyond investors’ target allocations, in which case now may be a good time to rebalance.
Seek alpha through active management, particularly in equity hedge and relative value.
Stay flexible when assets are mispriced. The firm said there are some asset classes where the risk outweighs the opportunity, such as high-yield bonds and small-cap equities.
Hold an appropriate level of cash, six to 18 months’ worth.
Keep your eyes on the goal. A long-term focus and a diversified portfolio are key to taking advantage of a continued bull market, while mitigating any losses from a potential bear market.

Tags: 2018 Outlook, Bull Market, Report, Wells Fargo